OPEC back in crunch talks as Russia resists a large oil cut

Discussions now centre on a proposed reduction from OPEC and its allies of about 1 million barrels a day, with OPEC itself shouldering 650,000 barrels of the burden

Such a deal remains far from certain after six hours of talks on Thursday concluded with Saudi Energy Minister Khalid Al-Falih saying he wasn’t confident an agreement could be reached.

By Bloomberg

Fri 07 Dec 2018 02:05 PM

OPEC kicked off a further day of talks on oil-production curbs after a summit on Thursday ended with no deal, as Russia resisted the big output cut that Saudi Arabia was demanding.

Discussions now centre on a proposed reduction from OPEC and its allies of about 1 million barrels a day, with OPEC itself shouldering 650,000 barrels of the burden, delegates said.

Such a deal remains far from certain after six hours of talks on Thursday concluded with Saudi Energy Minister Khalid Al-Falih saying he wasn’t confident an agreement could be reached.

“Not everybody is ready to cut equally,” Al-Falih told reporters in Vienna. “Russia is not ready for a substantial cut.”

Another sticking point in the talks is Iran’s contribution, a delegate said. The Persian Gulf nation is currently subject to US sanctions and sees no possibility of agreeing to curb its output, Oil Minister Bijan Zanganeh said Friday. Other members said it should participate, according to a delegate.

The lack of a deal so far shows how the Organization of Petroleum Exporting Countries is under pressure from forces re-drawing the global oil map, leaving it increasingly dependent on the support of non-member Russia while also subject to vociferous opposition from US President Donald Trump.

In a striking development, the US revealed that it turned into a net exporter of petroleum for the first time in 75 years last week thanks to the shale boom.

Russia, which initially sought a 100,000 to 150,000-barrel-a-day reduction as part of a new deal, may agree to a slightly larger cut depending on OPEC’s decision on its own output, a delegate said. Moscow insists its cut should be gradual and reconsidered after the first quarter since the market may shift, the delegate said.

Russian President Vladimir Putin and Energy Minister Alexander Novak discussed cooperation within the so-called OPEC+ alliance during several meetings on Thursday, Putin’s spokesman Dmitry Peskov said in Moscow. Novak is due to meet his counterparts in the OPEC+ coalition later Friday. If Russia decides to make a sizable cut, the cartel would follow up.

Oil’s duopoly

Much has changed for OPEC since 2016, when Russia and Saudi Arabia ended their historic animosity and started to manage the market together. The alliance has transformed the cartel into a duopoly in which the Kremlin is asserting its power.

“OPEC, or more precisely Saudi Arabia, has been the head honcho of the oil world for nearly six decades; yet these days it seems unable to make a decision without Russia’s blessing, let alone without risking the wrath of the US president,” said Stephen Brennock, an analyst at PVM Oil Associates in London.

Elusive agreement

An OPEC+ cut of about 1 million barrels a day is in line with the Saudi minister’s preference for a moderate reduction that wouldn’t “shock the market.” The kingdom is under economic pressure after a collapse in oil prices last month, yet it’s seeking to walk a fine line between preventing a surplus next year and appeasing President Donald Trump.

While Middle Eastern producers need high oil revenues to pay for government spending, sensitivities are different in Russia, which is running a budget surplus and benefits from a weak ruble that mitigates the effect of lower crude prices in dollars. The government is concerned about the impact of higher prices on consumers, stoking discontent with economic policy, according to one Kremlin official.

Russia’s contribution

The size of Russia’s contribution to any OPEC+ curbs has remained undefined through this week’s talks in Vienna. In private conversations earlier in the week, delegates said that Saudi Arabia had favored a Russian cut of about 300,000 barrels a day.

OPEC ministers were also discussing whether to exempt Libya and Venezuela from making cuts, another delegate said. Those countries, along with Nigeria, were opposed to participating in a supply reduction, the delegate said.

Before Thursday’s meeting, Al-Falih said that “if everybody is not willing to join and contribute equally, we will wait until they are” and he was prepared for the consequences of no deal.

"Some countries will struggle because their economies are very constrained" and Nigeria itself could only manage a small cut, Minister of State for Petroleum Resources Emmanuel Kachikwu said in a Bloomberg television interview before the meeting.

Beyond its internal disputes, OPEC is also contending with opposition from the US president, who’s taken to using his Twitter account to berate the group’s policies and sees low oil prices as key to sustaining America’s economic growth.

While ministers met on Wednesday, Trump tweeted that the “world does not want to see, or need, higher oil prices!” Thursday’s inconclusive talks could end up giving the president what he wants.

Following OPEC’s meeting on Friday, the group is scheduled to meet with its non-OPEC partners at 12 p.m. in Vienna, a delegate said.

“The risk of OPEC+ not being able to agree on a deal was always very high and this will now pressurize prices significantly lower,” said Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd. “There is no anchor for the market.”